gold is a safe haven asset

Gold Is A

Safe Haven Asset

Gold Is A Safe Haven Asset

© 2014 GoldCore 2

TABLE of CONTENTS

Table of Contents .................................................................................................................... 2

INTRODUCTION ....................................................................................................................... 3

Definition of ‘Safe Haven’ ....................................................................................................... 4

RESEARCH ............................................................................................................................... 6

Academic Research ............................................................................................................... 6

Independent Research and Asset Allocation Research .......................................................... 8

HISTORICAL RECORD ............................................................................................................13

CONCLUSION ..........................................................................................................................15

ABOUT THE AUTHOR .............................................................................................................17


© 2014 GoldCore 3

INTRODUCTION

S

"The desire of gold is not for gold. It is for the means of freedom and benefit"

Ralph Waldo Emerson

There is a significant and growing consensus amongst academics, independent researchers

and asset allocation experts that gold is a hedging instrument and a safe haven asset. Thus,

many financial professionals, including GoldCore, now believe that gold should form part of

investment and savings portfolios for reasons of diversification and financial insurance

Indeed, there is now a large body of academic and independent research showing gold is a safe

haven asset and showing gold’s importance in investment and pension portfolios. This

allocation is in order to both enhance returns but more importantly reduce overall volatility.


© 2014 GoldCore 4

Gold in US Dollars - 1971 to Today (Quarterly) - Bloomberg

The importance of owning gold in a properly diversified portfolio has been shown in numerous

academic papers. It has been shown in independent research by the asset allocation

specialists, Mercer Consulting and Ibbotson Associates. It has also been shown by consulting

group, New Frontier Advisors and by leading international think tank, Chatham House.

Gold has protected people throughout history from inflation and currency debasement. The

historical record also shows how gold has protected people from stock and property market

crashes, and from asset confiscation.

Definition of ‘Safe Haven’ An investment that is expected to retain its value or even increase its value in times of market

turbulence. Safe havens are sought after by investors to limit their exposure to losses in the

event of market downturns. However, what are considered safe havens alter over time as


© 2014 GoldCore 5

market conditions change, and what appears to be a safe investment in one down market could

be a disastrous investment in another down market.1

1 http://www.investopedia.com/terms/s/safe-haven.asp


© 2014 GoldCore 6

RESEARCH

Academic Research Since the financial crisis began, there has been a remarkable explosion in research on gold.

There is an increasing consensus in academia that gold is a safe haven asset.

Gold’s qualities as a hedging instrument and safe haven asset have been thoroughly examined

in recent years. Sherman (1982) suggested a weighting of 5% in an equity portfolio resulted in

lower risk and higher return2.

Research by Hillier, Draper et al (2006)3 suggests weights in the small percentages for a variety

of precious metals, with gold acting as the most efficient diversifier. Baur and McDermott (2010)

confirmed in their more recent research that gold is an excellent hedge for equity investors and

a safe haven for bond investors internationally4.

2 ‘Gold: A Conservative, Prudent Diversifier’ - Journal of Portfolio Management, Sherman (1982)

http://www.iijournals.com/doi/abs/10.3905/jpm.1982.408850#sthash.X9hVwS6c.dpbs 3 ‘Do precious metals shine? An investment perspective’ - Financial Analysts Journal, Hillier, Draper et al (2006)

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=903774 4 ‘Is gold a safe haven? International evidence’ - Journal of Banking and Finance, Baur and McDermott (2010)

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1516838


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Gold and S&P 500 - 1999 To Today - Bloomberg

Perhaps the most studied area is the role and weighting that gold might have in a portfolio.

Studies by Bruno and Chincarini suggest allocating 10% of the portfolio to gold for non-US

investors5. Scherer recommends a 5-10% weighting of gold for sovereign wealth funds6. For

high net worth individuals and family offices, Klement and Longchamp (2010)7 suggest an

allocation in the range of 5% to 10% by weight to gold in an equity portfolio.

Lucey, Poti et al. (2006)8 examine portfolio choice where the investor is concerned with

downside protection and find an optimal weight of between 6% to 25%, depending on the time

5 ‘Historical Examination of Optimal Real Return Portfolios for Non-US Investors’ -Review of Financial Economics,

Bruno & Chincarini (2010) - http://econpapers.repec.org/article/eeerevfin/v_3a19_3ay_3a2010_3ai_3a4_3ap_3a161-178.htm 6 ‘A note on portfolio choice for sovereign wealth funds’ - Financial Markets and Portfolio Management, Scherer

(2009)

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1626336 7 ‘Managing currency risks for global families’ - Journal of Wealth Management, Klement, J. and Y. Longchamp

(2010)

http://www.iijournals.com/doi/abs/10.3905/jwm.2010.13.2.076#sthash.2uhJpkCJ.dpbs 8 ‘International Portfolio Formation, Skewness and the Role of Gold’ - Frontiers in Finance and Economics’ - Lucey,

Poti and Tully (2006)

http://www.tcd.ie/iiis/documents/discussion/pdfs/iiisdp30.pdf


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period and the other assets included. Baur and Lucey (2010)9 provided the first statistical test of

when gold acts as a safe haven and when as a hedge.

An academic paper, ‘Hedges and Safe Havens – An Examination of Stocks, Bonds, Oil, Gold

and the Dollar' by Dr Constantin Gurdgiev and Dr Brian Lucey10 and was presented in

November 2011 at a conference hosted by the Bank for International Settlements (BIS), the

ECB and the World Bank.

This excellent research paper clearly shows gold's importance to a diversified portfolio due to

gold's "unique properties as simultaneously a hedge instrument and a safe haven."

Independent Research and Asset Allocation Research Many studies have shown that precious metals are one of the few asset classes with a positive

correlation coefficient with inflation. According to asset allocation experts, Ibbotson Associates11,

precious metals are the most positively correlated asset class to inflation. From a strategic point of

view, Ibbotson determined that portfolios could reduce risks and improve returns with a 7-15%

allocation to precious metals bullion.

In another important comprehensive study, Wainwright Economics12, the respected independent

research firm, said that gold is the most effective indicator of rising inflation. Their research proves

gold’s role as effective protection against inflation shocks and shows gold as the most accurate

indicator of future inflation and, when used alongside other inflation shields, is an effective hedge

against inflation.

9 ‘Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold’ - Financial Review, Baur and Lucey

(2010)

http://www.tcd.ie/iiis/documents/discussion/pdfs/iiisdp198.pdf 10

‘Hedges and Safe Havens – An Examination of Stocks, Bonds, Oil, Gold and the Dollar' - Lucey and Gurdgiev, TCD (2011) www.tcd.ie/iiis/documents/discussion/abstracts/IIISDP337.php 11

‘Portfolio Diversification with Gold, Silver and Platinum’ - Ibbotson Associates (2005) 12

‘How much bullion would equity investors need to hold to insure against inflation?’ - Wainwright Economics (2010)


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Gold and S&P 500 - 1998 To Today (Rebased to 1) - Bloomberg

Wainwright Economics research shows that gold is a superior predictor of inflation when

compared with other measures such as inflation indices and oil. The research provides strong

support for gold’s long assumed role as a hedge against extreme events and economic shocks,

including inflationary shocks. Because gold is an asset that goes up with inflation and actually

increases at several times the rate of inflation, it is an excellent choice to be used alongside

inflation indexed bonds.

Oxford Economics research on gold in 2011, ‘The impact of inflation and deflation on the case for

gold13,’ showed how gold is a good hedge against inflation as well as deflation.

Other excellent independent research has confirmed gold's unique role as a diversifier and

foundation asset in the portfolios of investors, especially at a time of heightened currency,

investment and systemic risk. The respected New Frontier Advisors (NFA) confirmed in research

13

‘The impact of inflation and deflation on the case for gold,’ Oxford Economics (2011) www.goldcore.com/gold-media/Oxford_Economics_Report_on_Gold_GoldCore.pdf


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in 2012 (‘Gold as a strategic asset for European investors‘14 that gold is an important

diversification especially to Europeans and to investors and savers exposed to the euro.

A study by the World Gold Council15 shows that a 1% increase in money supply triggers an

average 0.9% increase in the price of gold six months later. When the money supply in the

Eurozone is expanded, the gold price will also rise by 0.9% within six months.

In addition, gold is an excellent indicator of the velocity of money, especially in the USA. The gold

price anticipates an increase in the velocity of money and interprets it as future inflation.

Gold is a good hedge against black-swan events and against tail risk. According to a study by

Mercer16, the so-called conditional value at risk can also be reduced drastically by adding just 5%

of gold to a portfolio. This risk parameter (also called expected shortfall or expected tail loss)

defines the deviation in case of an extreme event.

14

‘Gold as a strategic asset for European investors,’ New Frontier Advisors (NFA) (2011) www.gold.org/download/rs_archive/wgc_gold_as_strategic_asset_european_investors.pdf 15

‘Linking Global Money Supply to Gold and Gold to Future Inflation’, World Gold Council, (2010)

http://www.gold.org/download/rs_archive/money_supply_paper_jan10.pdf 16

‘Gold als Anlageklasse für institutionelle Investoren’ - ‘Gold as investment class for institutional investors’, Mercer (2011)

http://www.xetra-gold.com/xetragold/dispatch/de/binary/gdb_content_pool/imported_files/public_files/10_downloads/31_trading_member/80_Xetra_Gold/Mercer_Gold_Report110308.pdf


© 2014 GoldCore 11

U.S. Dollar Index (USDX) - 1970 to Today - Bloomberg

“Gold will prove a haven from currency storms” is the conclusion of a wide-ranging analysis of the

world monetary system by Official Monetary and Financial Institutions Forum, (OMFIF), the global

monetary think-tank. The OMFIF report entitled, ‘Gold, the Renminbi, and the multi-currency

reserve system,’ warns of “twin shocks” to the dollar and the euro and of a “coming dollar shock”

and points out how gold would be a safe haven in a dollar crisis17.

Demand for gold is likely to rise as the world heads towards a multi-currency reserve system

under the impact of uncertainty about the stability of the dollar and the euro, the main official

assets held by central banks and sovereign funds.

The U.K.’s influential research institute Chatham House or the Royal Institute of International

Affairs has said that gold can be used to hedge against currency devaluation and other risks as

part of a diversified portfolio.

17

. ‘Gold, the Renminbi, and the multi-currency reserve system’ - Official Monetary and Financial Institutions Forum, (OMFIF) (2013) http://www.gold.org/download/pub_archive/pdf/OMFIF_report_summary.pdf

http://www.gold.org/download/pub_archive/pdf/OMFIF_report_summary.pdf


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“Gold can serve as a hedge against declining values of key fiat currencies, and can also be useful

for central banks looking to diversify their foreign reserves,” Chatham House said18.

18

‘Gold and the International Monetary System’ - A Report by the Chatham House Gold Taskforce, Chatham House (2012) http://www.chathamhouse.org/sites/default/files/public/Research/International%20Economics/r0212gold.pdf

http://www.chathamhouse.org/sites/default/files/public/Research/International%20Economics/r0212gold.pdf


© 2014 GoldCore 13

HISTORICAL RECORD

S

Besides academic research there is also the historical fact and people’s experience of owning

gold - both in recent years and in history.

Throughout history, from ancient Greek and Roman times to Europe in medieval times to

Germany in the 1920s and many other countries in the 20th century, gold has protected people’s

savings and wealth from the debasement of paper currencies and from the scourge of inflation.

Gold’s portability has helped people to protect their savings and create new lives for themselves in

other regions or countries. From Jewish refugees fleeing Nazi Germany to Vietnamese boat

people fleeing the war in Vietnam - gold has protected.


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Some of the many times when gold protected people’s wealth in just the last 100 years are -

Germany in the 1920’s, much of the world in the Great Depression in 1930’s and during World

War II, China in 1949, the western world in the 1970’s, the USSR in 1990, Argentina in 1989 and

2001 and Zimbabwe in 2008.

Indeed, since 2007 and the global financial crisis, people in Ireland and indeed much of the

western world who own gold have protected and grown their wealth. Last year, gold protected

people in Cyprus from bail-ins and the deposit confiscation.


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CONCLUSION

"The possession of gold has ruined fewer men than the lack of it"

Thomas Bailey Aldrich

Numerous studies prove that gold reduces overall risk and improves performance by enhancing

returns. Gold is unusual as there is no statistically significant correlation between gold and

economic data. Gold smoothes the fluctuations in the portfolio especially in highly volatile

periods.

Gold is not subject to liquidity risk, its market risk is lower and it does not have any credit risk. In

contrast to shares or bonds, there are no liabilities attached to gold and unlike stocks, bonds

and currencies, gold cannot go bankrupt or go to zero. Based on this alone, gold is important for

reasons of diversification.


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The fact that there is no counterparty risk associated with owning physical gold is one of the

unique features that make gold optimal portfolio insurance and a vital diversification.

The empirical evidence as seen in the academic research, independent research, price

performance over the long term and the historical record shows gold is a safe haven asset over

the medium and long term.

Gold protects people from economic turbulence and turmoil. This was seen in every decade in

the last 100 years and again in recent years.

Typical investor allocations to gold remain very low and the vast majority of investors still have

little or no allocation to gold. This places significant capital at risk and creates unappreciated

exposures and risks.

The evidence in favour of a continuous strategic allocation to gold has been growing for some

time and gold’s benefits in an investment portfolio is slowly being reappraised.


© 2014 GoldCore 17

ABOUT THE AUTHOR

Mark O’Byrne is the Research

Director at GoldCore. Mark is

recognised globally as a leading

analyst on the precious metals

market and his daily Market Update

is quoted and reported on in Dow

Jones MarketWatch, Bloomberg,

CNN and many others.

Follow Mark on Twitter @

GoldCore


© 2014 GoldCore 18

WRITTEN BY

GoldCore

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